In reply to Coel Hellier:
> Why would they be worse off?
> Let's assume they default on all debts, pull out of the Euro, and let the Drachma plummet to some low value. Instantly their economy is much more competitive.
Your exports are more competitive but your imports become eyewateringly expensive. Greece is not an export led economy, it has a negative balance of trade, it imports way more then they export. Their tourist, some specialist foods, refined petroleum products and shipping industries will do all right but the fact that almost 37% of their imports are made up of crude oil will sink them alone, half their power stations run on imported coal, add to that the increased cost of their next biggest imports, pharmaceuticals, cars, raw materials for manufacturing it paints a bleak picture. Throw in capital flight, hyper inflation and the fact that the EU (their biggest trade partner) will simply not allow not allow Greece to stroll off into the sunset after burning lenders (i.e. German, French, Dutch and UK taxpayers) it gets even more ugly.
> Yes, they now have to run a balanced budget, but that's much easier with a more competitive economy, and without having to pay the interest on debts of 360 billion Euros. That's about 20 billion a year in interest alone.
> As for people lending to them, well Argentina defaulted on its debts, and a few years later people started lending to them again.
At wonga style interest rates, the Argentinian peso is worthless, everyone trades in dollars on the black market there meaning even fewer tax receipts. Ten plus years after defaulting (and nearly defaulting again last year) their 10 year Government bonds have been trading at anything between 8 - 12% (anything above 7% is considered f*cked) and they are still being pursued through the US courts for their 2001 shambles. That is just the macro effect, on a street level life savings were destroyed and pensions made worthless as the cost of buying anything imported soared.
> The basic point is that Greek debt of 175 per cent of GDP is not payable, and being in the Euro locks them into a totally uncompetitive economy. They need devaluation and debt write-off in order to stand any chance.
> Of course they do have to do other things to reform the economy, including getting people to pay taxes.
I agree the current debt arrangement is not sustainable and some kind of haircut needs to be implemented but simply defaulting is not an option for a supposed advanced European country.
Post edited at 11:19